What Does A US Dollar Index Breakout Tell Us?

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1.) OIL – Everyone wants cheaper energy, cheaper gasoline, etc. Of course, for the most part, markets (oil futures) dictate those costs. Gasoline can be different. The US hasn’t built a refinery in over 30 years, so our government has held up progress in the ability to drive gasoline prices lower. Go figure. The cost of oil has now dropped about 35% since the beginning of April. That’s great…IF we had the capacity to refine the massive oil supply we have from fracking…but because of the refinery situation, we can’t. So, oil is down about 35%...but the national average price for regular unleaded gas on April 15 (slightly after the oil spike) was $4.11. Today that price is about $3.93, or about a 4% drop from that April price. Now, from a trading perspective, oil is in a spot where it would not surprise me one bit if we got a bit of a rally. Do I think it will be a huge rally? Hard to say. Momentum is still very negative for oil, which is a difficult headwind to fight in market space. But traders are betting heavily on a continued drop in oil as evidenced by the amount of short positioning in oil. That could really squeeze the price of oil higher. Bottom line? I wouldn’t expect the price of gas to come down much in the near term. Oil is “on the edge.” A break below $74 likely drives it lower. A hold here could start to squeeze short traders.

2.) US DOLLAR – On March 3rd, I asked the question if the US Dollar was headed higher. At that time, the US Dollar Index was hovering around $98. I commented back then that if the Index held above that level, it would flip bullish trend and start pulling upside momentum. Well, on Thursday last week, the Index broke out above its August 2025 high. Now it is highly likely that momentum starts chasing it higher. Is that good? Depends. In most cases, a strong dollar can hamper risk assets in the intermediate term. So far, that isn’t happening. But, with the Dollar now in a bullish trend, traders will likely start taking notice and increase the probability of chasing it higher. As you can see below, there’s a decent amount of upside potential. Some of this is likely coming from investor "flight to safety". But most of it is likely a macro response to the potential for future rate hikes as inflation stays sticky high.

3.) FEAR – I’ve often said that reasonable fear is good for a healthy bull market. Markets tend to climb that proverbial wall of worry. The bottom line is that bull markets die on optimism, not fear, worry, and skepticism. It appears that there is still a healthy amount of fear in the system. At some point, if the US Dollar Index above keeps moving higher, and Fed Funds markets keep pricing in rate HIKES for next year, the fear might become real.